A debate not for the faint hearted - bonds

American bonds have been the hot topic of the news lately: are you bearish or bullish? Is there really a bubble? When will buying stop? I will set out both sides of the argument and then you as the reader can decide.

Bearish:
-US Treasuries have continued to yield less and less, with inflation-adjusted bonds for the next four years even having a negative yield
-Bond funds for the past three years have had massive inflows, while equity funds have been experiencing an exodus, making a bubble resembling the tech disaster 10 years ago
-Capital losses on bonds are looming as every rate increase by the government will devalue bonds and rates can go nowhere but up at this point

Bullish:
-Many people believe that the US will never default making this situation quite different from the tech crash, as capital is nearly guarenteed
-There are also other investors who believe that aging demographics increase the number of risk averse assets demands, therefore bond buying will continue as the baby boomers age
-With the economy at its current pace there is a good chance that rates will not be increasing anytime soon.

Both sides present good points, so now its up to you to decide.

Bacon for Breakfast again

In May of this year, the debt problems of Europe were the front page story of every newspaper you could think of. The PIIGS (Portugal, Italy, Ireland, Germany, Spain) piling debt seemed to be an insurmountable problem looming over Europe, until much of the European Union compromised on a bailout to solve the problems that were on the verge of breaking out of control. Throughout the start of August headlines have avoided the Eurozones debt difficulties, but is it too early to writeoff those problems just yet? Credit Default Swap (CDS) spreads are one of the best ways of measuring the likelihood of a European country's default. When these spreads rise the likelihood of default increases, and vice versa. From July to August CDS spreads for the PIIGS countries had been in decline, but since the start of August CDS spreads have quietly started to climb back up again. Investors beware the PIIGS are back.

Are you eating your Wheaties?

A possible great buy right now would be 1 month call options on wheat, with fires ravaging the crops in Eastern Europe so far this summer. It has been the hottest summer on record in Russia, Kazakhstan, and Ukraine creating a great number of fires in the European region. The extensive fires have caused Russia to ban grain exports because of the need to keep existing wheat in the country. These fires in addition to huge rainfall in Canada, another large wheat producer, has spiked demand for the commodity worldwide and prices are starting to increase. With the hot weather and fires not expected to drop till the end of August, buying a 1 month call option for grain commodities is a no brainer, as demand can only increase from here. Other grain products are also on the rise as well, acting as substitutes for the precious grain at the moment, making rice and corn pretty good bets to appreciate as well. Next time you eat breakfast, don't take that bowl of cereal for granted.

U.S.A.: Uncontrollable Sovereign-debt Actions

If the United States are not careful they will have the largest sovereign debt problem the world has evern seen. Europe's own problems have caused U.S. government debt to hit absurdly low yields, but soon enough investors will lose confidence in the U.S. debt market and realize how dangerous this market has become. In the foreseeable future interest payments on debt will exceed defense spending in the country, which is a feat in itself, and will undoubtably cause investors to realize the problems in this market. If changes are not made to the mounting debt problem in the U.S., Ben Bernanke will be looking more like a chump than the champ he was after the financial meltdown. If you can wait it out. Betting against U.S. Treasuries seems like an unparalleled investment.

Sometimes you just cant make sense of everything

Invsetors have recently been pouring money into bond markets and seeing gold prices soar as a flight to safety. Talks of a double dip recession and financial bailouts have dominated the news lately and at yesterday's close there was a death cross in the S&P 500 where the 50 day average falls below the 200 day average, a typical signal of a market decline...but wait! the S&P 500 was up 3.13% on the day and people will get to go home today feeling a little bullish about their investments. This just goes to show that no matter how much analysis and economic data that is produced, nothing can predict the movements of the market. As an investor, if you cannot come to terms with this you might want to think about a different way to spend your money.

Good ol' boring bonds

There has been huge speculation recently about a potential double dip recession and worries about growth in China, which has led many investors to shy away from the risky stock market. I wouldn't blame worrisome investors either, as markets have shown extreme volatility this year and the Dow Jones Industrial Average now sits below 10000 points. Investors have been reverting to bond investments this year, but if you look back to the past decade, there is evidence to prove that bonds have outperformed stocks not only this year, but for the whole decade. If dividends are included in gains, the S&P 500 lost close to 10% over the past decade, while bonds saw gains of around 4% depending on the coupon and maturity of the bond investments. My advice is unless you have expert skills to exploit the market's volatility, bonds look to be a safer choice in the unchartered waters ahead. Although the markets are failing right now, be prepared for a great buying opportunity to come; at that time you can use the money you safely invested in bonds to enter the stock markets again.

Digging for Dividends

The lastest worldly economic failures have caused interest rates to greatly fall and have directed investors towards government bonds in a flight to safety. What does this do? An increased demand in bonds increases the price of bonds, and falling interest rates cause coupons on bonds to fall, both creating lower yields on bonds. For ivnestors looking for higher yields and a little more risk, investors should look to long standing healthy companies that have dividend yields because these companies dividends are outyielding government bonds. Strong comapanies such as Coca-Cola, Johnson & Johnson, and Procter & Gamble have all had steady consistent dividend distributions for the last decade and yield more the the current 10 year government bond in the U.S. If you are willing to take a little more risk, not only can you have greater yield on your investments, but these companies also have potential for capital apprectiation, which is unlikely in this economic environment for bonds within the next five years. If you can afford to take a little more risk, these consistent dividend providers are a better choice than government bonds right now.

Taking advantage of emotions

I made a previous post about how oil stocks were undervalued because of BP's oil disaster, but there is another stock that is substantially undervalued because of an emotional agenda by the public against it. If I told you that there was a stock on the market with consistently high earnings year after year, had a EPS of $24/share, and P/E multiple of 5.5x what would you do? The obvious answer is to buy it. The stock just described is Goldman Sachs. The enemy of all American taxpayers, the SEC, and every other investment bank on the street. Although the company has had its fare share of lawsuits and bad press, the negative public perception of this company has not changed its earnings. In the last quarter alone Goldman traders made money every single day during that time period, something almost unimagineable. There is some risk to buying Goldman stock, but after seeing the stock's recent slide over the past three months the stock is seriously underpriced. The time to but this profiting giant is now because these consistent profits will not go unnoticed for much longer.

Obama our savior!...wait not so fast

This past week has seen the American government make serious actions towards improving the financial system in te United States by proposing reforms to curb risky proprietary trading, to increase capital requirements, and finally to limit the investment in and support of hedge funds and private equity. I will focus particularly on the situation regarding the new limits to hedge fund and private equity investment. The new Bill concerning hedge fund investment, coined the Volcker Rule, limits banks participation in private equity and hedge funds to 3%, which seems like a huge victory for the Obama administration. Finally the banks cannot risk huge amounts of money! On first inspection this rule seems great, but looking at the finer details of the Rule, many banks will not be affected by this change for a decade. According to the Bill, banks would have two years to comply to withdraw from these types of investments, with potential for a three year extension further to those original two years. After this five year period banks could seek another five years from the American government for illiquid assets like real estate and other less frequently traded investments. So before everyone gets excited about the government's ability to lower the risk of bank investments look at some of the finer details of the Bill. Maybe there could be penalties for not dumping these assets by a certain time? Just a thought.

RIM: the end of an era...not quite

RIM, the maker of the imfamous Blackberry, has been under a lot of scrutiny lately for falling behind other phone makers like Google (Android) and Apple (iPhone). Personally, I think investors are being a little tough on RIM. With a P/E ratio of 12x, much below its fellow industry rivals, RIM is the stock set to appreciate. People are far too caught up in the hype of advertising from tech giants like Google and Apple, which have inflated P/E multiples of over 20x earnings. Although there is high competition in the phone software business, I think many people are forgetting the innovation that RIM is capable of and their stock has been hit far harder than it should have been in the past couple months. RIM's launch of its new model phone will put RIM back on the right track, and make of its critics look stupid. Be prepared for a RIM comeback by the end of the year.

Robin Hood is back

With the G20 summit meeting happening this week in Toronto it seems like an appropriate time to talk about the proposal of a bank tax by major countries around the world. Much of the public perceives the bank tax as a great way to penalize banks and ensure that tax payers are not liable for the wrong doings of big banks again. What many people do not realize is that the bank tax has many drawbacks that country's should consider before immediately supporting the idea of constricting the banking industry. The fact that a insurance fund for potential bank problems is being set up might actually promote riskier banking behaviour because banks know they can take excessive risks and still have a fall back plan. Many banks might simply see that if you pay the tax, you are entitled to future bailouts. The bank tax also does nothing to fix the "too big to fail" metality, as smaller financial institutions will face huge taxes if they become bigger, resulting in fewer competitors for the Goldman Sachs, Morgan Stanleys, and Bank of Americas of the world. The bank tax is ultimately a punishment of financial institutions, but really the problem came more from a lack of regulation by government, which is supposed to be the corrective mechanism in the economy to smooth out potential problems. Lastly, banks do a particularly good job of directing costs away from them to the consumer, so be ready for higher banking costs if you are pushing for a bank tax. Do not jump to conclusions to quickly about a global bank tax without properly understanding its implications. This time robbing the rich to feed the poor does not work so well after all.

China in the driver's seat

As the world's markets began to trade again this week, sentiments of an improving economy may be coming to fruition on news that China has stopped pegging its currency to protect the country's large exporting business from price volatility. News of China's move echoed in today's morning results in the world markets, as nearly all markets have seen a rise on growing confidence in the equities from China's switch to a floating currency. Although the switch does not erase the European sovereign debt problem or the growing deficits in the U.S., China is proving how its economy can be the motor of economic recovery that the world so desparately needs. One of the best signs for growing demand and confidence for investors is to see U.S. treasuries fall in price (as they did today) as it shows people are not just moving to the safety of government bonds. If China can continue to generate demand the world might soon be able to smile again.

Chinese Bubble Bath

The time has come for yet another housing collapse of a leading world economy. Just like Japan and the U.S., China is ready to have a real estate collapse of huge proportions. Although there is large underlying demand in the country, housing prices are racing to new heights every day, creating a bubble that not even Chinese demand can keep up with. Many people are saying that the rising prices in China are from urbanization and rising incomes, but with interest rates so low housing prices have more than quadrupled in the last five years! Second-time home buyers now have to put down a minimum down payment of 40%, an inconcievable number in many countries. This begs the question that many investors in the U.S. said during their own housing crisis: when should I short the Chinese housing market? The answer is not clear, but it is easy to see that housing prices likely will not drop until interest rates in China begin to rise or demand begins to fall. There is no specific time frame for such activity, but keep your eye on housing prices in China because there is massive potential for this looming crash.

If only the world's economy could be like Apple

Apple, led by CEO Steve Jobs, is on the verge of releasing the iPhone 4 just weeks after its ingenious iPad debut just months before. What makes Apple so amazing is how the company manages to be on the cutting edge of technology year after year after year. The company has annually produced some of the most innovatives products in the world and buyers globally follow Apple products religiously, as carriers of the new iPhone just recently took 600000 preorders. What makes Apple more impressive is that they have done this without any debt! Apple effectively has a debt to equity ratio of 0. Hey Europe, jealous yet? Many people should look to Apple to see how they have enjoyed success by growing at a rate only from the reinvestment of their own earnings. Apple has a great business model that minimizes risk by having little debt and having some of the best innovations of any company in the world. Apple is even more attractive now than it was to Adam.

BP: Oil's last stand?...Not quite

BP has caused everyone in the world to be nervous about oil companies for many years to come. Rightfully so, BP's stock has lost over 30% of its market capitalization and their debt has been downgraded in just weeks, as everybody wants to disassociate themselves from BP's ravaging of the Gulf of Mexico. While BP has been in free fall, BP's problems have caused other oil companies' stock to fall on less confidence in the oil industry. Companies like Exxon and Shell have taken a hit most likely because of a sell off of the oil industry in general after BP's catastrophe. What people do not realize is oil is still the worldest most demanded commidity and until a reliable alternative is found it will be for years to come. As well, the oil giants of the world are earnings machines with each company generating billions in profits each year. Therefore, now is the time to buy oil companies cheaper...with the obvious exception of BP, mother nature's worst enemy.

The Great White North: Not all banks are bad

In the past three years it would be tough to tell anyone to buy a bank stock given the turmoil in U.S. mortgages, European sovereign debt, and various different scandals. If you look to Canada it is a different story. Canadian banks not only weathered the financial storm, but have better capital structures to counteract the balance sheet problems many other banks are facing and most Canadian banks are trading a reasonable P/E ratio from 12-15x. When the global banking industry finally turns itself around, Canadian banks will be a safe bet for capital gains. The best part about Canadian banks for investors is their highly attractive dividend yield. Currently the big 6 Canadian banks are all yielding 3.5-5%, which is great for any buy and hold investor. The continually good earnings and stability of the Canadian banking sector make these picks great for a conservative investor worried about the recent global financial turmoil. Canada may be cold in the winter, but its banks stocks are sure warm to investors.

Austalia: More than just Kangaroos

Many people have not paid enough attention to Australia, but there time to turn the corner economically is now. Along with Canada, Australia is an extremely resource rich country that is located just below China, the world's largest growing economy. As China continues to grow it will demand huge amounts of commodities that Australia will be ready to provide. Within the last year the Australian stock market, driven by commodities, has increased 12.5%, giving evidence to Autralia becoming a powerful economy. Now might be the time to invest in Australia, not just by planning a vacation.

The End of Mutual Funds

For the past 50 years many different types of investors who do not have much investing experience or just want to gain diversification in their portfolios have turned to choosing mutual funds. Although mutual funds are not a bad place to put your money, there are a few misconceptions that should be broken surrounding mutual funds. Many investors turn to mutual funds because of an experienced asset manager leading a fund or because they commonly advertise that they "will beat the market". If you look into these claims very seldom do even the best asset managers beat the market and over the long term, 10 years or more, index and stock averages do better than mutual funds. In addition to false advertising that mutual funds can actually "beat the market", they have high annual costs of up to 1-2% of assets held. So even before your money is working for you, the mutual fund manager must make up 1-2% gains just to be even with the market. So what does this add up to? The much better option to mutual funds are ETFs or exchange traded funds. Although they are not a very exciting investment, investing in an index that have historically outperformed mutual funds, and costs only 0.25-0.5% a year, ETFs are by far the more sounds choice. Be a smart investor, choose ETFs.

IMAX

My first stock pick is the IMAX Corporation. IMAX has recently risen over 30% in the past month alone. Why? The growing trend and increasing interest in 3D movie technology has moved IMAX to be at the forefront of entertainment industry. IMAX’s base theatre network has grown by 79 complexes since 2008 signalling the global intrigue of the 3D technology. From 2007 to 2008, IMAX experienced negative revenue growth, but with the emerging popularity of 3D, revenue jumped close to 70% in 2009. IMAX has struggled in the past 5 years due to problems growing revenue, but with the new rise in 3D technology, investors should expect the increase in revenues to drive growth for the company. Not only are revenues growing, but IMAX has doubled its profit margin in the last quarter since the beginning of 2009. If IMAX continues to outperform analyst sales forecasts, the company will be in great shape for a successful 2010. With expanding partnerships in France, Japan, and now Ukraine IMAX is set for global expansion and a takeover of the movie entertainment world.
Currently the stock price sits at 19.82%. I expect IMAX to hit $25 by summer’s end. Call me bullish, but I like IMAX.